ATLANTIC RICHFIELD COMPANY, PETITIONER V. USA PETROLEUM COMPANY
No. 88-1668
In The Supreme Court Of The United States
October Term, 1989
On Writ Of Certiorari To The United States Court Of Appeals For The
Ninth Circuit
Brief For The United States And The Federal Trade Commission As
Amicus Curiae Supporting Petitioners
TABLE OF CONTENTS
Question Presented
Interest of the United States
Statement
Summary of argument
Argument:
Competitors do not suffer antitrust injury as a result of
nonpredatory price competition undertaken pursuant to a
maximum resale price agreement
A. A plaintiff suffers antitrust injury only if its injury
results from an anticompetitive effect of the violation
alleged
B. The antitrust laws do not protect competitors from
nonpredatory pricing by rivals
Conclusion
QUESTION PRESENTED
Whether a firm suffers antitrust injury when it loses sales to
competitors that are charging nonpredatory prices pursuant to a
vertical, maximum price-fixing scheme.
INTEREST OF THE UNITED STATES
The Department of Justice and the Federal Trade Commission enforce
the federal antitrust laws. This case presents the question whether a
firm has suffered antitrust injury as a result of nonpredatory price
competition from companies that have a vertical agreement to maintain
a maximum resale price. The United States has an interest in ensuring
that this question is resolved in a manner that advances, rather than
impedes, the procompetition objectives of the antitrust laws.
STATEMENT
1. Petitioner Atlantic Richfield Company (Arco) is a vertically
integrated oil company whose operations include the marketing of
Arco-brand gasoline in the western United States. Arco sells to
customers through its own stations and through independently owned
stations that resell gasoline under the Arco brand name. Respondent
USA Petroleum Company (USA) is an "independent" marketer of gasoline.
USA, like other independents, buys gasoline from major petroleum
companies for resale under its own brand name. USA's retail outlets
are high volume, low overhead "discount" stations that typically
charge less for equivalent quality gasoline than stations selling
under a major brand name. /1/ J.A. 11-16, 58-59.
In early 1982, Arco adopted a new marketing strategy to become more
price-competitive with USA and other independents. Arco's strategy
was to reduce its dealers' costs (e.g., by elimiating credit card
sales) and to encourage them to meet or beat the prices of independent
stations. To accomplish that objective, Arco gave its dealers such
incentives as "temporary competitive allowances" and "temporary volume
allowances." Arco's strategy resulted in increased sales and market
share. See Pet. 3.
In early 1983, USA filed a complaint against Arco in United States
District Court for the Central District of California, alleging, inter
alia, that Arco's conduct violated Sections 1 and 2 of the Sherman
Act, 15 U.S.C. 1, 2. /2/ USA's amended complaint alleged that "Arco
and its co-conspirators have organized a resale price maintenance
scheme, as a direct result of which competition that would otherwise
exist among Arco-branded dealers has been eliminated by agreement, and
the retail price of Arco-branded gasoline has been fixed, stabilized
and maintained at artificially low and uncompetitive levels." J.A. 17
Paragraphs 27. Count one charged that the various incentives Arco
offered to its dealers, together with "severe and predatory price
cuts," were intended to drive independents out of the market in
violation of Section 1 of the Sherman Act. J.A. 17-18 Paragraphs
27-29. Count two charged that Arco had engaged in an attempt to
monopolize in violation of Section 2 of the Sherman Act. J.A. 21-23
Paragraphs 42-48.
In March and June 1986, Arco moved for summary judgment on the
Sherman Act claims. For purposes of its motions, Arco assumed the
existence of a maximum resale price fixing agreement between it and
the dealers that sold Arco gasoline. Arco contended, however, that
USA had not suffered the "antitrust injury" needed to pursue its
Section 1 claim. Arco argued that, as a competitor, USA would suffer
antitrust injury from the alleged vertical maximum price agreement
only if the prices the Arco dealers charged under the agreement were
predatory. /3/ Arco further maintained that, as a matter of law, the
record would not support a finding of predatory pricing. /4/ C.A.
E.R. 83, at 18-19; id. Exh. 1, at 35-42.
The district court dismissed the Section 1 claim. The court said:
"Even assuming that the plaintiff can establish a vertical conspiracy
to maintain low prices, the plaintiff cannot satisfy the 'antitrust
injury' requirement of the Clayton Act Section 4, without showing such
prices to be predatory." Pet. App. 3b. The court then concluded that
USA could make no showing of predatory pricing because, given Arco's
market share and other characteristics of the relevant market, Arco
was in no position to exercise market power. /5/ Pet. App. 4b.
2. a. A divided panel of the Ninth Circuit reversed. The court
framed the issue before it as "whether a competitor's injuries
resulting from vertical, non-predatory, maximum price fixing fall
within the category of 'antitrust injury,'" Pet. App. 3a. The court
noted that under this Court's decision in Brunswick Corp. v. Pueblo
Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977), a plaintiff "'must prove
antitrust injury, which is to say injury of the type the antitrust
laws were intended to prevent and that flows from that which makes
defendants' acts unlawful.'" Pet. App. 4a. Applying its understanding
of Brunswick, the court concluded that USA had sufficiently alleged
antitrust injury.
The court began by recalling that under this Court's decisions, any
form of price fixing violates Congress's intent "that market forces
alone determine what goods and services are offered, at what price
these goods and services are sold, and whether particular sellers
succeed or fail." Pet. App. 12a (citing United States v. Socony-Vacuum
Oil Co., 310 U.S. 150 (1940); Kiefer-Stewart Co. v. Joseph E. Seagram
& Sons, Inc., 340 U.S. 211 (1951); Albrecht v. Herald Co., 390 U.S.
145 (1968); and Arizona v. Maricopa County Medical Society, 457 U.S.
332 (1982)). Based on this observation, the court believed that the
key inquiry in determining whether USA suffered "antitrust injury" was
whether USA's "injuries resulted from a disruption of competition in
(USA's) market caused by (Arco's) antitrust violations." Pet. App.
13a. The court concluded that this requirement was satisfied. It
stated: "USA's claimed injuries were the direct result, and, indeed,
* * * the intended objective, of ARCO's price-fixing scheme.
According to USA, the purpose of ARCO's price-fixing scheme is to
disrupt the market of retail gasoline sales, and that disruption is
the source of USA's injuries." Ibid.
The court rejected the need to explain how a maximum resale
price-fixing agreement caused "antitrust injury" to a competitor,
concluding instead that "the proper question is not what type of
injuries a rule against maximum resale price maintenance was meant to
prevent, but what kind of injuries rules against price fixing were
meant to prevent." Pet. App. 14a. The court simply noted that, in
general, price fixing interferes with competition because it "distorts
the markets, and harms all the participants." Ibid. The court added
that even if it were to consider maximum resale price fixing in
isolation, it would reach the same result in light of the potential
"long-term consequences of that practice." Id. at 15a.
The court also rejected Arco's argument, based on Cargill, Inc. v.
Monfort of Colorado, Inc., 479 U.S. 104 (1986), that USA's injury
resulted from an increase, rather than a decrease, in competition.
The court characterized both Cargill and Brunswick as cases involving
an "attenuated or indirect" connection between the antitrust violation
and the injury because the injuries resulted only from "pricing
practices" that were themselves legal. By contrast, the court noted,
USA's injury "result(s) directly from pricing practices that
defendants admit (for the purposes of this appeal) are forbidden by
the antitrust laws and are therefore illegal." Pet. App. 15a-16a. The
court concluded that the "failure of * * * firms, when due to illegal
pricing practices, must be characterized as a 'lessen(ing) (of)
competition', not an increase in competition." Id. at 19a.
b. Judge Alarcon dissented. In his view, Brunswick required the
court to evaluate USA's injury in light of the anticompetitive effects
of the specific violation alleged because "(t)he anticompetitive
effects will be different depending on the type of price fixing
agreements involved. He noted that horizontal price-fixing agreements
are condemned because they "create market power that did not
previously exist" and that the "effect of minimum price fixing,
whether horizontal or vertical, is generally higher prices." By
contrast, Judge Alarcon observed, maximum price fixing is not thought
"as destructive as minimum price fixing principally because it
generally results in lower prices to consumers." Pet. App. 28a-29a.
He also noted Professor Areeda's view that vertically imposed, maximum
price fixing agreements -- which affect only one supplier's dealers --
are "'virtually never anticompetitive.'" Pet. App. 32a (citing P.
Areeda & H. Hovenkamp, Antitrust Law Paragraph 335.2h n.56 (Supp.
1987)).
Accordingly, Judge Alarcon concluded that to the extent that USA
was injured by Arco's low but nonpredatory prices, it would suffer no
antitrust injury. Whether or not Arco's own dealers might be able
legitimately to claim that their "'freedom' to set prices" had been
impaired, it was, in his view, implausible that USA was "'forced' * *
* to match ARCO's prices when most of the market had set prices above
those" of Arco. Pet. App. 33a & n.7. The majority, he argued, had
erred in focusing on whether "ARCO's alleged anticompetitive acts were
of the type the antitrust laws were intended to prevent as opposed to
whether its injury was of the type the antitrust laws were intended to
prevent." Id. at 37a. The alleged violation could injure USA only by
"lower(ing) prices to consumers," and this type of "injury" raises
concerns under the antitrust laws only if prices are so low as to be
predatory. Id. at 36a. Accordingly, Judge Alarcon concluded that USA
failed to demonstrate antitrust injury to itself. Id. at 39a.
SUMMARY OF ARGUMENT
The court of appeals erred in holding that a plaintiff who competes
with the defendant's dealers suffers antitrust injury when a maximum
resale price agreement with those dealers result in nonpredatory price
competition. By its holding, the court has achieved the ironic result
of allowing a competitor to seek treble damages because of lost sales
due to aggressive, but nonpredatory, pricing by a rival. This holding
is inconsistent with decisions of this Court and with the purposes of
the antitrust laws.
A private plaintiff does not adequately state a claim for relief
under the antitrust laws simply by alleging injury as a result of an
antitrust violation; the plaintiff must also establish "antitrust
injury" to itself. That showing must "reflect the anticompetitive
effect either of the violation or of anticompetitive acts made
possible by the violation." Brunswick Corp. v. Pueblo Bowl-O-Mat,
Inc., 429 U.S. 477, 489 (1977). The court of appeals' holding is
incompatible with this principle. In cases involving per se
violations, the court's treatment of antitrust injury would
effectively dispense with any analysis of the "anticompetitive effect"
of the violation and would authorize recovery whenever the plaintiff
could show injury through its participation in a market "disrupted" by
that violation. Such an analysis ignores the fact that when the
pricing of a firm is not predatory, the business lost by its rivals
cannot be viewed as an "anticompetitive" consequence of the claimed
violation. Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104
(1986); Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475
U.S. 574 (1986).
The court of appeals' holding is also wrong because it is based on
the mistaken premise that the antitrust laws are intended to provide a
private remedy for any and all market "distortions", whether or not
they are related to the pro-consumer goal of protecting competition.
While several reasons have been advanced for deeming vertical, maximum
price-fixing agreements to be illegal per se, see Albrecht v. Herald
Co., 390 U.S. 145 (1968), it has never been a purpose of that rule to
protect competitors from lower prices. Reduced, but nonpredatory,
prices have the same effect on a competitor as the price competition
that the antitrust laws are designed to foster.
Affording rivals the opportunity to challenge conduct that injures
them only through increased competition is unnecessary to deter
vertical maximum price fixing. To the extent such conduct visits on
distributors the anticompetitive consequences described by this Court
in Albrecht, those distributors have adequate incentive to sue.
Recognizing antitrust injury in this case, however, would only
encourage competitors to argue that their rivals' fully lawful
vertical nonprice agreements are actually disguises for unlawful price
restraints. The availability of that sort of claim would undercut
this Court's efforts to "assure that the market-freeing effect of
(rule of reason analysis of nonprice vertical restraints) is not
frustrated by related legal rules." Business Electronics Corp. v.
Sharp Electronics Corp., 108 S. Ct. 1515, 1520 (1988).
ARGUMENT
COMPETITORS DO NOT SUFFER ANTITRUST INJURY AS A RESULT OF
NONPREDATORY PRICE COMPETITION UNDERTAKEN PURSUANT TO A MAXIMUM RESALE
PRICE AGREEMENT.
A. A Plaintiff Suffers Antitrust Injury Only If Its Injury Results
From An Anticompetitive Effect Of the Violation Alleged
A private antitrust plaintiff must allege not only that it has been
injured as a result of an antitrust violation, but also that its
injury is one that the antitrust laws were designed to forestall.
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 487 (1977);
Blue Shield v. McCready, 457 U.S. 465, 483 & n.19 (1982); Associated
General Contractors of California, Inc. v. California State Council of
Carpenters, 459 U.S. 519, 539-540 (1983). In Brunswick, which
established the requirement of antitrust injury, the Court squarely
rejected the notion that every "dislocation() caused by" an antitrust
violation constitutes antitrust injury compensable under Section 4 of
the Clayton Act, 15 U.S.C. 15. Brunswick involved a challenge by
bowling center owners to a merger of rival bowling centers. The
plaintiffs claimed that but for the illegal merger, their rivals would
have gone out of business, thereby allowing the plaintiffs to increase
their market share and profits. This Court concluded that a mere
causal link between the plaintiffs' injury and the violation, standing
alone, was inadequate. 429 U.S. at 487. Recognizing that every
antitrust violation has the "potential for producing economic
readjustments that adversely affect some person," ibid., the Court
held that private antitrust damage plaintiffs must satisfy the
additional element of showing "antitrust injury, which is to say
injury of the type the antitrust laws were intended to prevent and
that flows from that which makes the defendants' acts unlawful." Id.
at 489. Explaining that the antitrust laws were enacted "'for the
protection of competition, not competitors," id. at 488 (quoting Brown
Shoe Co. v. United States, 370 U.S. 294, 320 (1962), the Court
stressed that it would be "inimical to the purposes of the()
(antitrust) laws" to award damages for profits lost due to
competition. 429 U.S. at 488.
The Court extended and reinforced the concept of antitrust injury
in Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104 (1986).
There, a firm proceeding under Section 16 of the Clayton Act, 15
U.S.C. 21, sought to enjoin a merger of its rivals. It alleged that
it might lose profits as a result of increased price competition made
possible by efficiencies resulting from the merger. The Court held
that, even assuming the merger was unlawful because of the threat to
competition in a relevant market, allegations of possible price
competition at "some level at or slightly above (the merged company's)
costs" did not establish a threat of antitrust injury to a firm
competing in that market. 479 U.S. at 114-117. The Court explained
that nonpredatory price competition, even if undertaken with the goal
of increasing market share, did not threaten antitrust injury to a
competitor. "To hold that the antitrust laws protect competitors from
the loss of profits due to such price competition would, in effect
render illegal any decision by a firm to cut prices in order to
increase market share." Id. at 116. See also Phototron Corp. v.
Eastman Kodak Co., 842 F.2d 95, 99-100 (5th Cir.), cert. denied, 108
S. Ct. 1996 (1988). In contrast, the Court recognized that if there
were proof that the merged company "would attempt to drive (a
competitor) out of business by engaging in sustained predatory
pricing," that claim would stand on a different footing. Because
"predatory pricing has as its aim the elimination of competition," it
is a practice that can inflict antitrust injury. 479 U.S. at 117-118.
/6/
The court of appeals in this case believed that because respondent
alleged a price-fixing agreement, it was unnecessary to determine
whether respondent's injury flowed from anticompetitive effects of the
violation. All forms of price fixing, in the court's view, are
illegal per se not because of the particular threats they pose to
competition, but because they disrupt or distort the functioning of a
competitive market in a general sense. Thus, the court concluded, a
firm faced with intensified competition in a market "disrupted" by any
price fixing agreement suffers antitrust injury, even if the
competitor's pricing is not predatory. Pet. App. 11a-13a.
In ignoring the nature of the price competition that a firm faces,
the court of appeals misunderstood the inquiry mandated by Brunswick
and Cargill. This Court has been at pains to emphasize that
increased, vigorous competition does not itself constitute antitrust
injury to a competitor. Rather, antitrust injury arises only when the
competitor is adversely affected by the anticompetitive consequences
of the practices complained of. In the case of pricing practices,
only predatory pricing has the requisite anticompetitive effect. /7/
Cargill, 479 U.S. at 117-118; Matsushita Electric Industrial Co. v.
Zenith Radio Corp., 475 U.S. 574, 586 (1986); Brunswick, 429 U.S. at
489 n.14.
The court of appeals purported to distinguish Brunswick and Cargill
on the basis that those cases turned on an "attenuated or indirect"
relationship between the alleged violation and the plaintiff's injury.
Pet. App. 15a-16a. In neither case, however, did the Court state or
imply that the injuries were too "attenuated" or "indirect" to justify
the plaintiff's claim of antitrust injury. In fact, in each case the
plaintiff's injury was alleged to flow directly as a consequence of an
alleged antitrust violation (a merger). /8/ The court of appeals also
found Cargill not applicable here because the "pricing practices" that
allegedly would have resulted from the illegal merger were not in
themselves illegal or anticompetitive. Pet. App. 15a. But in this
case as well, only the vertical agreement to fix maximum prices --
like the merger in Cargill -- is illegal. Nonpredatory prices are not
illegal in themselves, nor are they an anticompetitive consequence to
a competitor. Thus, such prices do not inflict antitrust injury on
that competitor simply on the theory that different prices might have
prevailed in the absence of an antitrust violation. /9/
Nor does the fact that vertical, maximum price-fixing agreements
are deemed illegal per se justify dispensing with the requirement that
an antitrust plaintiff's injury flow from the anticompetitive
consequences of the violation. The per se rule narrows the range of
pertinent issues in an antitrust case, thereby reducing the burden of
establishing liability. But "(b)oth per se rules and the Rule of
Reason are employed 'to form a judgment about the competitive
significance of the restraint.' * * * Indee, there is often no bright
line separating per se from Rule of Reason analysis." NCAA v. Board of
Regents, 468 U.S. 85, 103-104 & n.26 (1984). See also Indiana
Grocery, Inc. v. Super Valu Stores, Inc., 864 F.2d 1409, 1419 (7th
Cir. 1989). Regardless of the alleged violation, the antitrust injury
requirement serves the purpose of limiting recovery to injuries that
"reflect the anticompetitive effect either of the violation or of
anticompetitive acts made possible by the violation." Brunswick, 429
U.S. at 489 (emphasis added).
Any remaining doubt that a per se violation does not eliminate the
need for distinct antitrust injury is swept away by Matsushita
Electric Industrial Co. v. Zenith Radio Corp., supra. In that case,
the plaintiffs challenged a horizontal price fixing conspiracy,
"perhaps the paradigm of an unreasonable restraint of trade." NCAA v.
Board of Regents, 468 U.S. at 100. See Arizona v. Maricopa County
Medical Society, 457 U.S. 332 (1982); United States v. Socony-Vacuum
Oil Co., 310 U.S. 150 (1940); Standard Oil Co. v. United States, 221
U.S. 1 (1911). The Court, however, did not conclude on that basis
alone that the plaintiffs could challenge an alleged conspiracy among
their rivals to set low prices. /10/ Instead, citing Brunswick, the
Court stated that the plaintiffs "must show that the conspiracy caused
them an injury for which the antitrust laws provide relief" and that
such a "showing depends in turn on proof that (the defendants)
conspired to price predatorily * * *." 475 U.S. at 484 n.7. /11/ The
Court thus insisted that competitor-plaintiffs demonstrate not only
that they were injured by their rivals' alleged per se violation, but
also that the injury reflects an anticompetitive effect of the
violation. This principle cannot be reconciled with the holding of
the court of appeals in this case that any competitor experiencing
dislocation as a result of a per se violation thereby establishes
antitrust injury.
B. The Antitrust Laws Do Not Protect Competitors From Nonpredatory
Pricing By Rivals
Under Brunswick, Cargill, and Matsushita, the critical question
with respect to the antitrust injury requirement is whether
respondent's losses from the lower but nonpredatory prices "occurred
'by reason of' that which" made the alleged vertical maximum
price-fixing agreement unlawful. Brunswick, 429 U.S. at 488.
Unfortunately, the court of appeals' "generic illegal price fixing
analysis" (Pet. App. 39a (Alarcon, J., dissenting)) made it
unnecessary for the majority to consider carefully the rationale for
the per se prohibition of vertical, maximum price-fixing agreements.
Properly analyzed, that prohibition is not intended to protect rival
dealers from nonpredatory price competition.
1. Price fixing agreements differ in their purpose, operation, and
effect. Thus, while all naked price fixing agreements are unlawful,
they are not unlawful for the same reason. The classic price-fixing
agreement is a minimum price fixing conspiracy among competitors. The
Sherman Act condemns such agreements without regard to the
reasonableness of the prices fixed. See Catalano, Inc. v. Target
Sales, Inc., 446 U.S. 643 (1980) (per curiam); United States v.
Trenton Potteries Co., 273 U.S. 392 (1927). These agreements are
deemed unlawful, not because of any abstract concern about
"disrupting" markets, but because they directly reduce consumer
welfare, which is the central concern of the antitrust laws. See,
e.g., Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979). Minimum
price-fixing agreements among competitors are deemed illegal per se
because their effect is to raise prices and reduce output to the
detriment of consumers. /12/
Other types of agreements affecting price, however, present
different threats to consumer welfare. While vertical price fixing is
illegal per se, the scope of the per se rule applicable to vertical
price restraints has been carefully focused in order to avoid chilling
potentially pro-competitive nonprice vertical restraints. Business
Electronics Corp. v. Sharp Electronics Corp., 108 S. Ct. 1515, 1520
(1988); Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 763
(1984). Vertical nonprice restraints limiting competition among a
single supplier's dealers "ha(ve) real potential to stimulate
interbrand competition" and thereby increase consumer welfare. See
Business Electronics, 108 S. Ct. at 1519; 324 Liquor Corp. v. Duffy,
479 U.S. 335, 341-342 (1987); Monsanto, supra; Continental TV, Inc.
v. GTE Sylvania, Inc., 433 U.S. 36 (1977). Accordingly, all vertical
restraints except price restraints are judged under the rule of reason
rather than the per se rule.
Maximum price agreements also present a more tenuous threat to
consumer welfare than minimum price agreements. This Court has twice
considered horizontal, maximum price-fixing agreements and concluded
that they are "on the same legal -- even if not economic -- footing as
agreements to fix minimum or uniform prices." Arizona v. Maricopa
County Medical Society, 457 U.S. 332, 348 (1982); Kiefer-Stewart Co.
v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211 (1951). /13/ Those
decisions suggest two primary reasons for that conclusion. First, an
agreement ostensibly setting maximum prices may operate in fact as a
minimum price agreement if virtually all the participants charge the
maximum price. Maricopa County, 457 U.S. at 348. Second, the Court
has suggested that maximum price agreements may inhibit vigorous and
effective competition by the parties bound, acting to "cripple the
freedom of traders and thereby restrain their ability to sell in
accordance with their own judgment." Kiefer-Stewart, 340 U.S. at 213.
/14/
In only one decision has the Court explicitly confronted a
vertical, maximum price-fixing arrangement. In Albrecht v. Herald
Co., 390 U.S. 145 (1968), a newspaper distributor sought to charge his
customers more than the suggested retail price advertised by the
publisher, and, after the publisher attempted to discipline the
distributor by hiring other persons to take away his customers, the
distributor brought suit under Section 1 of the Sherman Act. The
Court held that the vertical, maximum price-fixing arrangement before
it was unlawful per se. The Court acknowledged that "(m)aximum and
minimum price fixing may have different consequences in many
situations." But the Court reiterated the view expressed in
Kiefer-Stewart that any agreement on price "'cripple(s) the freedom of
traders.'" 390 U.S. at 152.
The Court then explained the ways in which a vertical agreement
fixing maximum prices may inhibit vigorous competition by the dealers
bound by it. The Court noted that a maximum price-fixing scheme, "by
substituting the perhaps erroneous judgment of a seller for the force
of the competitive market, may severely intrude upon the ability of
buyers to compete and survive in that market." 390 U.S. at 152.
"Maximum prices," the Court explained, "may be fixed too low for the
dealer to furnish services essential to the value which goods have for
the consumers or to furnish services and conveniences which consumers
desire and for which they are willing to pay." Id. at 152-153. And,
by limiting the ability of smaller dealers to engage in nonprice
competition, a maximum price-fixing agreement might "channel
distribution through a few large or specifically advantaged dealers."
Id. at 153. Finally, the Court observed that a maximum price-fixing
agreement may "tend() to acquire all the attributes of an arrangement
fixing minimum prices." Id. at 153 & n.9.
2. Respondent's alleged injury does not reflect any of the
potential threats to competition described by the Court. Respondent's
losses flow from nonpredatory price competition with firms assumed to
have a vertical, maximum price-fixing agreement. But the Court in
Albrecht did not discuss, as a policy consideration supporting the
application of the per se rule to vertical, maximum price-fixing, the
effect of that practice on competitors. Rather, the Court's focus was
on protecting dealers in the particular product that is the subject of
the maximum price-fixing agreement.
Respondent, of course, did not experience any of those kinds of
anticompetitive effects. For example, if the vertical agreement fixes
"(m)aximum prices * * * too low for the dealer (in the product) to
furnish services" desired by consumers, or in such a way as to channel
business to large or well-situated distributors, Albrecht, 390 U.S. at
152-153, a competitor dealing in other brands would not be harmed.
Indeed, a competitor might benefit since it would be free to offer the
services consumers desire and for which they are willing to pay. And
if the maximum price agreement "acquire(s) all the attributes of an
arrangement fixing minimum prices," id. at 153, respondent would not
suffer antitrust injury because a competitor "may not complain of
conspiracies that * * * set minimum prices at any level." Matsushita,
475 U.S. at 583-585 n.8.
Indeed, respondent's alleged injury is indistinguishable from the
effect of the vigorous competition that the antitrust laws are
designed to promote. As the Court explained in Cargill and
Matsushita, the only price competition that threatens both competitors
and competition is predatory pricing. When prices do not fall below a
level viewed as "predatory," a competitor faces only the rigors of
marketplace competition, and succeeds or fails on the basis of the
efficiency and quality of its business. Because "cutting prices in
order to increase business often is the very essence of competition,"
Matsushita, 475 U.S. at 594, the lowering of prices to a nonpredatory
level cannot cause an injury to competitors that the antitrust laws
are designed to prevent. See Indiana Grocery, Inc. v. Super Valu
Stores, Inc., 864 F.2d 1409, 1419 (7th Cir. 1989). See also P. Areeda
& H. Hovenkamp, Antitrust Law Paragraph 334.2c, at 306 (1988)
("protecting high price suppliers against lower priced competition
desired by consumers is not an injury that the antitrust laws are
designed to prevent, nor does it flow from the rationale for
condemning maximum price fixing"); Page, The Scope of Liability for
Antitrust Violations, 37 Stan. L. Rev. 1445, 1469-1470 (1985).
There is no need to dilute the antitrust injury requirement as
applied to competitors in order to encourage private enforcement of
the rule against vertical, maximum price fixing. If a vertical,
maximum price-fixing scheme does cause the anticompetitive
consequences described in Albrecht, the manufacturer's own dealers
will suffer. Those dealers would furnish an adequate pool of
plaintiffs. Cf. Associated General Contractors of California, Inc. v.
California State Council of Carpenters, 459 U.S. at 542 ("existence of
an identifiable class of persons whose self-interest would normally
motivate them to vindicate the public interest in antitrust
enforcement diminishes the justification for allowing a more remote
party * * * to perform the office of a private attorney general").
/15/
Finally, recognizing antitrust injury when a competitor faces
nonpredatory price competition may have the undesirable effect of
discouraging perfectly legitimate arrangements between a supplier and
its dealers. A competitor has an incentive to sue its rivals only
when a vertical restraint has actually increased interbrand
competition. But such enhanced competition may well be the fruit of
lawful, nonprice, vertical restraints. Finding antitrust injury in
cases such as this will encourage competitors to cast their challenges
to potentially procompetitive nonprice, vertical restraints in a per
se price-fixing mold. The litigation costs of such competitor suits
could seriously undermine the Court's efforts to "assure that the
market-freeing effect of (rule of reason analysis of nonprice vertical
restraints) is not frustrated by related legal rules." Business
Electronics, 108 S. Ct. at 1520. /16/
CONCLUSION
The decision of the court of appeals should be reversed, and the
case remanded for further proceedings.
Respectfully submitted.
KENNETH W. STARR
Solicitor General
MICHAEL BOUDIN
Acting Assistant Attorney General
DAVID L. SHAPIRO
Deputy Solicitor General
MICHAEL R. DREEBEN
Assistant to the Solicitor General
CATHERINE G. O'SULLIVAN
STEVE MACISAAC
Attorneys
KEVIN J. ARQUIT
General Counsel Federal Trade Commission
AUGUST 1989
/1/ The primary distinction between a "major" and an "independent"
oil company is that "'(a) major oil company is usually integrated in
that it operates on the four functional levels of production,
transportation, refining, and marketing. Generally, a non-major does
not own its refinery, or if it does, the refinery is usually small.
The non-major usually owns and operates its'" own stations. Lehrman
v. Gulf Oil Corp., 464 F.2d 26, 30 n.1 (5th Cir.), cert. denied, 409
U.S. 1077 (1972) (citation omited). USA alleged that Arco is one of
the "majors", which it stated were "a small number of fully integrated
enterprises which are among the largest industrial corporations in the
United States and the world." J.A. 13 Paragraph 9.
/2/ USA also alleged violations of the Robinson-Patman
Anti-Discrimination Act, 15 U.S.C. 13(a), and the Cartwright Act, Cal.
Bus. & Prof. Code Sections 16700 et seq. (West 1987). Those claims
are pending before the district court.
/3/ Arco stated that "a 'predatory' price is one which creates the
dangerous probability that the defendant(s) may achieve a monopoly
with the concomitant ability to raise prices in the future." C.A. E.R.
83, at 18. See also J.A. 67-68.
/4/ Arco argued that USA could not prevail on its Section 1 claim
"for essentially the same reason that it cannot prevail on its claim
under Section 2 of the Sherman Act." C.A. E.R. 83, Exh. 1 at 35. With
respect to USA's Section 2 claim, Arco contended that the undisputed
sales and market share evidence established that there was no
"dangerous probability" that it could monopolize any relevant market.
The court had earlier granted Arco's motion to dismiss USA's Section 2
claim as originally pleaded, reasoning that the complaint contained
the "undisputed allegation that the end result of Arco's misconduct
would be a market controlled by all of the major oil companies," and,
therefore, the complaint "on its face, affirmatively alleges facts
that indicate() that no 'dangerous probability of success exists'"
that Arco would obtain a monopoly. USA Petroleum Co. v. Atlantic
Richfield Co., 577 F. Supp. 1296, 1304 (C.D. Cal. 1983). USA
subsequently amended its Section 2 claim, but, shortly after Arco
filed its summary judgment motion, USA voluntarily dismissed that
claim with prejudice. J.A. 78-79.
/5/ Specifically, the court found that "major-brand and minor-brand
gasoline retailers compete with each other in the same market" and
that the 17% "combined share of the relevant market held by (Arco and
its dealers) is clearly insufficient to present a dangerous
probability of monopolization." Pet. App. 2b-3b. The court also found
that, even if it were to "assume() arguendo that there exists a
separate 'discount' gasoline market, other major oil companies may
enter this market, as USA contends that (Arco) did in April 1982, and
the possibility of such entry effectively prevents" Arco and its
dealers from exercising market power. Id. at 3b.
/6/ The Court in Cargill declined to formulate a precise measure of
"predatory pricing," but accepted for purposes of its opinion a
definition of "pricing below an appropriate measure of cost for the
purpose of eliminating competitors in the short run and reducing
competition in the long run." 479 U.S. at 117. We believe that this
description accurately captures the conceptual underpinning of a
definition of predatory pricing. Cf. id. at 117 n.12; Matsushita
Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 584-585
nn. 8-9 (1986).
/7/ Although the question is an important one, this case does not
present an appropriate opportunity for the Court to address the
question of the precise showing needed to demonstrate that
petitioner's prices were "predatory." The court of appeals held that
regardless of the benchmark for determining whether pricing is
predatory, no such showing would be required. See Pet. App. 3a. Cf.
Cargill, 479 U.S. at 117-118 n.12; Matsushita, 475 U.S. at 589. That
holding would be incorrect no matter what specific standard was used
to establish predatory pricing. We note, moreover, that respondent
and petitioner apparently never developed a record on the cost issues
that would be needed to demonstrate (or rebut) predatory pricing. It
is true that respondent's amended complaint included general
allegations that Arco had organized a vertical price fixing scheme
with the effect of fixing prices of Arco gasoline at levels that were
"artificially low and uncompetitive," "severe and predatory," and
"below cost." J.A. 17-18 Paragraphs 27-29. In a subsequent pleading,
however, respondent identified as a "genuine issue() of fact" on the
Section 1 claim the question whether prices were fixed "at
artificially low levels," but made no reference to predatory pricing
or to below-cost pricing. J.A. 78. Moreover, respondent informed the
court of appeals that, because it had dismissed its Section 2 claim,
it had "offered no proof on predatory pricing." Resp. C.A. Br. 6.
Accordingly, the only question presented in this case is whether the
alleged vertical, maximum price-fixing agreement caused respondent
antitrust injury to the extent that it resulted in petitioner's
dealers charging lower, but nonpredatory prices. See Pet. i.
/8/ Indeed, the relationship between the alleged violation and the
injury in Brunswick could hardly be called "attenuated." The
plaintiffs claimed that the acquisitions were unlawful because they
"brought a 'deep pocket' parent into a market of 'pygmies'" (429 U.S.
at 487) and that this "deep pocket" injured them by allowing the
acquired bowling centers to remain in business, in competition with
the plaintiff. Likewise, the merger in Cargill was held unlawful and
enjoined by the lower courts, at least in part, because it would have
provided the acquiring party with multi-plant efficiencies, thus
permitting it to reduce the price of its final product (beef) while
"bidding up" the price of its primary input (cattle), and subjecting
the plaintiff and other producers in the market to a "price-cost
squeeze." 479 U.S. at 108. The lower courts held that the same
feature that made the merger unlawful -- the threat of a "cost-price
squeeze" -- would also cause the plaintiff injury. Ibid. Thus,
contrary to the court of appeals' analysis in this case, the flaw of
the plaintiff's case in Brunswick and Cargill was not one of
indirectness or attenuation of injury, but of a lack of the type of
injury the antitrust laws are designed to prevent. Compare Associated
General Contractors of California, Inc. v. California State Council of
Carpenters, 459 U.S. 519, 540-541 & n.46 (1983) (discussing "indirect"
and "remote" injury).
/9/ The court of appeals suggested that nonpredatory price
competition resulting from a vertical, maximum pricing-fixing
agreement could be anticompetitive because "when firms conspire to fix
low prices in order to drive out the competition, the long-term
consequences may be higher prices and reduced service to customers."
Pet. App. 19a. We believe that the observation has no relevance to a
case in which the defendant never attained more than 17% of the
relevant market. See Pet. App. 3b. In competitive markets, rival
firms would prevent higher prices or reduced services from prevailing,
to the extent that consumers desired lower prices or increased
services.
/10/ The Court stated that plaintiffs "must show more than a
conspiracy in violation of the antitrust laws; they must show an
injury to them resulting from the illegal conduct. * * * Except for
the alleged conspiracy to monopolize the American market through
predatory pricing, these alleged conspiracies could not have caused
(plaintiffs) to suffer an 'antitrust injury.'" 475 U.S. at 586.
/11/ Similarily, the Court explained that horizontal price fixing
that raises prices above a competitive level, though unquestionably
illegal, could not possibly work antitrust injury to a competitor:
"Nor can respondents recover damages for any conspiracy by petitioners
to charge higher than competitive prices in the American market. Such
conduct would indeed violate the Sherman Act * * *, but it could not
injure respondents: as petitioner's competitors, respondents stand to
gain from any conspiracy to raise the market price * * *. Cf.
Brunswick." 475 U.S. at 582-583. Under the reasoning of the court of
appeals, however, the conclusion that prices were fixed, even if
raised, would be sufficient to open the door to a showing of antitrust
injury, because price fixing of any variety "disrupts" the market.
See Pet. App. 13a.
/12/ In referring throughout this brief to per se illegal
price-fixing agreements, we mean only those agreements that do not
involve integrative efficiencies. See Broadcast Music, Inc. v.
Columbia Broadcasting System, Inc., 441 U.S. 1 (1979) (concluding, in
the particular circumstances before the Court, that an agreement among
competitors involving price -- a joint venture to market music
performance licenses under "blanket licenses" -- should be tested
under the rule of reason).
/13/ Although the restraint in Keifer-Stewart also operated to fix
prices vertically, see Maricopa County, 457 U.S. at 348 n.18
(characterizing restraint in Keifer-Stewart as both horizontal and
vertical), the agreement that was actually challenged, and that the
Court reviewed, was between two suppliers that had agreed to sell
liquor only to wholesalers who would adhere to "maximum prices above
which the wholesalers could not resell." 340 U.S. at 212. Under
then-applicable precedent, the suppliers were deemed horizontal
competitors. Id. at 231. Under current law, however, because the
suppliers were both wholly-owned by the same company, they would be
deemed incapable of conspiring under Section 1 of the Sherman Act.
See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984).
/14/ Thus, in Maricopa County, the Court observed that the maximum
price-fixing agreement among competing physicans could remove the
incentive to vigorous competition by preventing those with greater
skill, experience, training, or willingness to innovate from reaping
commensurate rewards. 457 U.S. at 348.
/15/ In Jack Walters & Sons Corp. v. Morton Building, Inc., 737
F.2d 698, 708-709 (7th Cir.), cert. denied, 469 U.S. 1018 (1984), the
court of appeals held that a terminated dealer did not experience
antitrust injury from a vertical, maximum price-fixing scheme. The
court reasoned that "the only harm to (the terminated dealer) came
from the fact that competing dealers (or (the supplier) itself) would
lower their prices to consumers if the (terminated dealer) did not."
737 F.2d at 709. We do not agree with the implication of the court in
Jack Walters that terminated or coerced dealers could never sue. In a
particular case, we believe that a dealer could be injured by its
supplier's maximum price-fixing scheme in a way that implicates the
concerns identified by the Court in Albrecht, 390 U.S. at 152-153. In
a proper case, therefore, we believe that a coerced or terminated
dealer could establish antitrust injury.
/16/ Respondent contends that it should be permitted to prove that
the prices charged by petitioner's dealers were predatory, even if
this Court holds that losses attributable to nonpredatory price
competition flowing from a vertical, maximum price-fixing agreement do
not constitute antitrust injury. Br. in Opp. 14-15. The district
court concluded that respondent would be unable to demonstrate that
petitioner engaged in predatory pricing, primarily because of Arco's
relatively small share "of the retail gasoline market in California
and Washington" (Pet. App. 3b) and its inability to forestall
competition from other major oil companies if it attempted to raise
prices after driving out independent competitors. Ibid. Cf. Cargill,
479 U.S. at 119-120 n.15 ("With only a 28.4% share of market capacity
and lacking a plan to collude, Excel would harm only itself by
embarking on a sustained campaign of predatory pricing. Courts should
not find allegations of predatory pricing credible when the alleged
predator is incapable of successfully pursuing a predatory scheme.").
Respondent did not directly challenge the district court's finding in
the court of appeals, and that court had no occasion to address the
issue, given its view that any injury respondent suffered as a result
of the alleged conspiracy was antitrust injury.
We note that formulation of the appropriate measure of cost for
purposes of defining predatory pricing is a difficult issue, on which
this Court has not previously had occasion to rule. See Matsushita,
475 U.S. at 584-585 n.8; Cargill, 479 U.S. at 117 n.12. As discussed
above, however, the question raised in the petition is expressly
limited to whether antitrust injury can flow from nonpredatory prices.
In our view, the court of appeals should resolve in the first
instance the questions whether respondent has preserved its right to
challenge the district court's conclusion about predatory pricing and,
if so, whether the district court's determination was erroneous. Cf.
Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S.
1, 24-25 & n.44 (1979) (remanding in similar circumstances).